It shouldn’t come as too much of a surprise that the US equity market rollercoaster ride that has been running since news of Omicron first broke last Friday continued through to NFP day (this Friday). The S&P 500 currently trades roughly 1.7% lower on the day and has dropped all the way back to just above 4500, despite at one point trading above 4600 earlier in the session. Thursday’s gains have thus been all but relinquished and the index is now trading within a whisker of the week low at 4504.70 and on course to close the week down roughly 1.9%. A break below 4500 could see a fast move down to the next area of resistance around 4300 (the September lows) over the course of next week.
Conditions have been choppy all week, with the index moving at least 1.0% in either direction every single day. In fact, (at this rate) the smallest intra-day move is set to be Wednesday’s 1.2% drop. The pick-up in volatility comes as market participants struggle to assess the outlook for the US and global economy as the Omicron Covid-19 variant spreads and as the Fed signals it is intent on pressing ahead with withdrawing monetary stimulus.
The US macro data this week has been very strong. Both ISM surveys pointed at strong expansion of manufacturing and service sector activity in November and, aside from the headline NFP number in Friday’s official labour market report, all other indicators point to a tight, strong labour market. Further evidence of underlying economic strength underpins the Fed’s hawkish shift this week. Recall that Chair Jerome Powell, after sounding very bullish on the economy but worries about inflation, said earlier in the week it would be appropriate to discuss accelerating the QE taper at this month’s FOMC meeting. St Louis Fed President, who is a 2022 policy voter, went further on Friday and was banging the drum about rate hikes as soon as Q1.
Up until Omicron came on the scene, equities were not bothered by increasingly hawkish Fed vibes. But Fed members did not use the new variant as an excuse to dial back on hawkishness as many had been hoping they would and at this point do not seem to deem it a significant economic threat. Equity investors, judging by the price action, disagree. They are, at least, assigning an elevated probability that the new variant does damage the growth outlook.
It looks as though Omicron is going to be super transmissible and is going to easily infect the vaccinate/naturally immune, so the equity market's best hope at this point is that the symptoms associated with infection are mild. If they are as bad as, say, delta, then lockdowns seem likely to “flatten the curve” of hospitalisations. If the symptoms are significantly milder, then stocks could come roaring back – a mild variant would be allowed to spread by health authorities as a means of achieving herd immunity and protecting against nastier Covid-19 variants. In this case, lockdowns would be off the table.